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Assessing welfare impacts of some debt-consolidation episodes in the European Union

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  • Miguel Viegas

    (GOVCOPP, DEGEI, Universidade de Aveiro)

  • Ana Paula Ribeiro

    ()
    (Faculdade de Economia da Universidade do Porto and CEF.UP)

Abstract

This paper aims at characterizing debt consolidation processes put forward by some European countries in order to assess welfare and, in particular, the inequality effects involved. For that we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy variables and the endogenous crosssection distribution of income and wealth. Results show that, with the exception of the Belgian case, all consolidation strategies entail positive welfare gains. The transition costs affect all episodes and are determinant in sorting among the welfareenhancing strategies. Our results confirm the superiority of the adjustments based on unproductive expenditures over those based on tax increases or social transfer reductions. Finally, all strategies involve lower welfare inequality costs.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 1106.

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Length: 34 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:por:cetedp:1106

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Keywords: fiscal consolidation dynamics; European Union; heterogeneous agent model; inequality; welfare.;

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  1. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
  2. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-75, December.
  3. Robert J. Barro, 1991. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  4. Miguel Viegas & Ana Paula Ribeiro, 2011. "Welfare-improving Government Behaviour and Inequality - Inspection Using a Heterogeneous-agent Model," CEF.UP Working Papers 1103, Universidade do Porto, Faculdade de Economia do Porto.
  5. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
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  9. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II," IMF Working Papers 06/69, International Monetary Fund.
  10. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
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  12. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  13. Francesca D'Auria & Cécile Denis & Karel Havik & Kieran Mc Morrow & Christophe Planas & Rafal Raciborski & Werner Roger & Alessandro Rossi, 2010. "The production function methodology for calculating potential growth rates and output gaps," European Economy - Economic Papers 420, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  14. repec:fth:coluec:754 is not listed on IDEAS
  15. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August.
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